Strong Dollar, Weak Dollar, Stable Dollar

The financial media is abuzz with news of a strong dollar vs a weak dollar. Which way will the dollar go? Traders churn trillions in currency and interest rate derivatives every market day betting on the outcome of this question. Trump and his administration seem to waver day-to-day on the question of whether a strong dollar is good or bad. During the campaign Trump argued for a strong dollar. In an April 12, 2017 WSJ article, Trump reversed course and now thinks a weak dollar is favorable. What is missing from the discussion is what exactly defines a strong or weak dollar. A strong or weak dollar is not an esoteric, amorphous concept. The dollar does not become strong because a Presidential administration hints it wants a strong dollar, without any definition of what that means. To define the value of the dollar requires a reference, the same as any other measurable quantity. Without a reference, there is no definition. This concept is innate to every science except economics. Economics is the dismal science for a reason.

The current concept of defining the dollar is by comparing the dollar’s value with other currencies. But all the other currencies also have no defined value. We are in a floating, fiat world. It is no different than attempting to define a geographical location off of a star of no fixed reference to the earth’s rotation. Why not instead use a star with a fixed reference? The North Star Polaris is a fixed celestial reference, true north in spite of a bit of wobble. In the monetary realm, gold is the fixed reference. It has maintained this reference for centuries, despite its own wobble. When governments link their currency with gold they get neither a strong dollar or a weak dollar. They get a stable dollar of defined, unchanging value. This is the only true goal of currency. Any deviation from this goal, i.e. a ridiculous two percent inflation target, results in government cheating their citizens of their labor, earnings, savings, and production. Society frays when government severs this bond.

If the dollar is strengthening against the Euro and Yen, is the dollar strong? Not necessarily if the dollar is in reality weakening, but at a lesser rate than the Euro and Yen. Yet, our current financial vernacular considers the dollar strong in this case. This results in demands for all types of errant monetary remedies. Geopolitical tensions escalate under the threat of trade wars. These perpetual currency wars go back and forth, never resolving in our floating, fiat world of no definition. Policy makers enact harmful, economic distorting fiscal policy to counter the misunderstanding of currency valuations. PhD economists scratch their heads in confusion. Their hindsight data and dissertation equations neither predict nor account for the economic turmoil.

Inflation can occur under the guise of a perceived strong dollar if the dollar is weakening less than other currencies. Similarly, a dollar that is perceived to be weak relative to other currencies can actually be strengthening when compared against the reliable reference of gold. Only when measured against the monetary reference of gold can the market make real determinations of a currency’s value. Gold signals these monetary distortions.

Trump can get the dollar he wants. The market will react to a Trump statement that he wants a strong/stable dollar. Just stating that Trump desires a strong/stable dollar is not enough. Speculators will challenge the stated intention of a currency’s value. The Fed has to follow through by adjusting the supply of base money relative to demand to maintain a stable dollar.

Trump could issue an executive order today for a return to a dollar defined at a specific weight of gold. Nixon ended Bretton Woods overnight by abandoning the dollar link to gold at $35/oz. The Fed is composed of bureaucrats who serve at the discretion of government. If a President and Treasury Secretary want monetary policy conducted in a certain way, Fed members have to do so or resign. The Treasury cannot create or extinguish base money. Only the Fed can monetize debt and regulate the balance of dollar supply that determines its value.

With a defined reference, the miasma of monetary confusion becomes clear. A strong, weak, or stable dollar has concrete meaning. Gold signals the value of all currencies relative to the optimum price of gold. A return to an international gold standard is as easy as the intellectual capacity to understand it. It can happen immediately once governments and policy makers understand that all currencies, despite our chaotic floating system, remain linked to each other and gold at a fixed value.